Financing a Start-Up
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    Financing a Start-Up Financing a Start-Up Presentation Transcript

    • Financing a Start-Up Presentation by Brian Goncher, Deloitte Venture Capital Group University of California, Berkeley February 8, 2006
    • Agenda PART I Venture Capital Trends PART II Creating Financial Projections Valuation Techniques Capitalization Exits Copyright © 2004 Deloitte Development LLC. All rights reserved. 1
    • PART I • Deloitte’s Venture Capital Group • Venture Capital in 2005 • Valuation Trends • Term Sheet Trends • IPO's and Acquisitions Copyright © 2004 Deloitte Development LLC. All rights reserved. 2
    • Deloitte’s Accelerator Program
    • Venture Capital Virtuous Cycle Venture Capital Relationships Deloitte Company Venture Goes Public Capital Company Team Funded Company Grows Copyright © 2004 Deloitte Development LLC. All rights reserved. 4
    • Success Story: Techwell Techwell Investors Include Technology Crossover Ventures Techwell Public founded in Offering in 1997, raised 5 Q4 2005 rounds of funding Techwell has annual sales of $50M+ and grew 100% in the past year Copyright © 2004 Deloitte Development LLC. All rights reserved. 5
    • Venture Capital Relationships • Silicon Valley VCs – Accel Partners – Sequoia Capital – August Capital – Spectrum Equity Investors – Bay Partners – Technology Crossover Ventures – Benchmark Capital – US Venture Partners – Charter Venture Capital – VantagePoint Venture Partners – ComVentures – Walden – Doll Capital Management – Woodside – Draper Fisher Jurvetson – Worldview Technology Partners – Focus Ventures – Foundation Capital • National VCs – Granite Ventures – Apax Partners – Hummer Winblad – Battery Ventures – Kleiner Perkins Caufield & Byers – Canaan Partners – Lightspeed Venture Partners – Greylock Partners – Mayfield Fund – Morganthaler Ventures – Menlo Ventures – New Enterprise Associates – Mobius Venture Capital – Oak Investment Partners – Mohr Davidow – Summit Partners – Outlook Ventures – TA – Redpoint Ventures – Venrock Copyright © 2004 Deloitte Development LLC. All rights reserved. 6
    • Deloitte Accelerator™ Services ACCELERATOR PACKAGE Business Advisory Audit* Events & Services BENEFITS CEO Development – fundraising, BENEFITS financial management, corporate governance, leadership, team Improved controls and building, sales process, reporting procedures networking and resources Tax* Human Resources* BENEFITS BENEFITS Compliance, Compliance and cost-savings strategies HR Best Practices and Recruiter Network * All available through Deloitte Accelerator online Copyright © 2004 Deloitte Development LLC. All rights reserved. 7
    • Tangible Deliverables Business Advisory Events & Services • Critical Success Factors for CEOs – 300 CEOs and 50+ VCs; review macro funding/industry trends; VC/colleague networking • CEO Development Workshops – Small group hands-on workshops focused on coaching and mentoring CEOs, providing valuable best practices training on fundraising, personal and team development • Investor Forum- CEOs of both early stage and late stage tech companies pitch to 50+ VCs • Balanced Schedule - 22 events scheduled for 2005 Copyright © 2004 Deloitte Development LLC. All rights reserved. 8
    • Tangible Deliverables Audit • Internal Accounting Control • Financial Literacy Quiz Checklist • Audit Committee Resource Guide • Revenue Recognition Policies & • Financing & Risk Management Procedures Service Cycles for Emerging • Option Valuation Model Companies • Account Reconciliation • GSC Guidebooks Templates • IQ Series • Financial Statement Closing • Audit Committee Brief Checklist • Controller’s Monthly Closing • Audit Readiness Guide Checklist • Sample Audit Committee • New Templates & Best Practices Charters and Checklist Released on A Regular Basis Copyright © 2004 Deloitte Development LLC. All rights reserved. 9
    • Tangible Deliverables Tax • Multistate Income/Franchise Tax, Sales & Use Tax, and Property Tax Checklist • International Tax Review • R&D Tax Credit Overview • Tax Compliance Due Date Calendar • Tax News & Views Newsletter • DBriefs Webcasts • CSM Ideas for Emerging Companies • New Templates & Best Practices Released on A Regular Basis Copyright © 2004 Deloitte Development LLC. All rights reserved. 10
    • Tangible Deliverables Human Resources • Critical Legal, Labor & Compliance Issues • Sample HR Internal Policies Guidebook • Sample HR Employee Manual • Employee Personnel File Checklist • Executive Recruiter Network • Executive Compensation Newsletter • GSC Guidebooks, Including “Stock Options for Growing Companies” • Human Capital IQ Newsletter • New Templates & Best Practices Released on A Regular Basis Copyright © 2004 Deloitte Development LLC. All rights reserved. 11
    • Venture Capital in 2005 • Fundraising • Investment Trends • Valuation • Term Sheets • Exits Copyright © 2004 Deloitte Development LLC. All rights reserved. 12
    • Fundraising Trends • Accelerated fundraising-$6B in Q2 2005 • Large funds raising record amounts – Menlo Ventures ($1.2B) – August Capital ($550M) – Mohr Davidow ($400M) – Blue Run Ventures ($188M) • New Funds entering market – Elevation Partners ($1B) – Agenda Capital (TBD) – Spark Capital ($250M) – Shasta Ventures ($210M) Copyright © 2004 Deloitte Development LLC. All rights reserved. 13
    • Fundraising in 2005 Commitments to Venture Capital Funds $83.5 $80 $58.8 $60 Funds Raised ($B) $50.5 $40 $26.9 $20 $17.1 $17.7 $12.7 $13.1 $7.0 $9.4 $5.4 $3.0 $0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 1Q05 Copyright © 2004 Deloitte Development LLC. All rights reserved. 14
    • Median Fund Size Increases Median VC Fund Size (for funds greater than $20M) $200 $185 $160 $150 Median Fund Size ($M) $110 $97 $100 $105 $100 $100 $83 $76 $75 $67 $53 $50 $0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 1Q05 Copyright © 2004 Deloitte Development LLC. All rights reserved. 15
    • Half of Funds Closed > $100M Allocation of Fund Size by Number of Funds Raised per Vintage Year 100% 80% Under $100M 50% 75% 70% $100M-$249M 60% $250M-$499M 40% 25% $500M-$999M 25% 20% 21% $1B+ 16% 25% 10% 0% 2% 1995 1997 1999 2001 2003 1Q05 Copyright © 2004 Deloitte Development LLC. All rights reserved. 16
    • Investing Trends • Steady investment from VCs in Silicon Valley-200 deals/qtr • New activity among seed and angel investors • “Boomer” group finally matures • Valuations increasing • Bi-polar world of newbies and serial entrepreneurs Copyright © 2004 Deloitte Development LLC. All rights reserved. 17
    • 18 Copyright © 2004 Deloitte Development LLC. All rights reserved. 18
    • Deal Flow and Investment in 1Q’05 Deal Flow and Equity into Venture-Backed Companies 6295 $100 $94.7 6,000 4595 5,000 $75 Amount Invested ($B) Number of Deals 4,000 3248 $49.6 $50 3,000 2547 2356 2211 $36.2 2114 2153 1912 2,000 1315 $21.9 $25 $17.9 $19.0 $20.9 $13.1 1,000 $9.2 474 $6.4 $4.6 $0 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 1Q05 Amount Invested ($B) Number of Deals Copyright © 2004 Deloitte Development LLC. All rights reserved. Source: Dow Jones VentureOne/Ernst &Young 19
    • Investment Activity in 1Q’05 Deal Flow and Equity into Venture-Backed Companies 650 $8 598 570 591 585 543 600 538 521 $6.4 502 521 500 504 474 $6 $5.9 $5.7 Amount Invested ($B) $5.3 $5.5 Number of Deals $5.0 450 $5.0 $4.8 $4.8 $4.8 $4.6 $4.4 $4.5 $4 300 $2 150 $0 0 1Q02 2Q02 3Q02 4Q02 1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 3Q04 4Q04 1Q05 Amount Invested ($B) Number of Deals Copyright © 2004 Deloitte Development LLC. All rights reserved. Source: Dow Jones VentureOne/Ernst &Young 20
    • Early and Later Stage Rounds Prevail in 1Q’05 Deal Flow Allocation by Round Class 100% 4% 10% 8% 34% Restart 80% 39% 40% % of Total VC Rounds Later 60% Second 32% 29% 19% 40% First 20% *33% Seed *36% *30% 0% 1Q02 3Q02 1Q03 3Q03 1Q04 3Q04 1Q05 *Seed and © 2004Rounds Combined All rights reserved. Copyright First Deloitte Development LLC. Source: Dow Jones VentureOne/Ernst &Young 21
    • Financing Sizes Pick Up in 1Q’05 Median Amount Invested by Round Class , VC Only $14 $12 Median Amount Invested ($M) $10.0 $10.0 $10 $8.2 $8 $7.1 $6.0 $6 $4.5 $4 $2 $1.5 $0.7 $0 1Q02 2Q02 3Q02 4Q02 1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 3Q04 4Q04 1Q05 Later Round Second Round First Round Seed Round Copyright © 2004 Deloitte Development LLC. All rights reserved. Source: Dow Jones VentureOne/Ernst &Young 22
    • Amount Invested in Rounds at Late 90’s Levels Median Amount Invested by Round Class (Annual) , VC Only $20 Median Amount Invested ($M) $15 $10.0 $10 $8.2 $5.0 $6.0 $5 $4.0 $2.9 $1.0 $0.7 $0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 1Q05 Later Round Second Round First Round Seed Round Copyright © 2004 Deloitte Development LLC. All rights reserved. Source: Dow Jones VentureOne/Ernst &Young 23
    • More Investors Go It Alone in 1Q’05 Number of Investors Per Round 100% 23% 18% 30% 80% 5+ Investors 9% 16% 15% 4 Investors 60% 16% 16% 19% 3 Investors 40% 22% 23% 20% 2 Investors 20% 1 Investor 30% 34% 31% 0% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 1Q05 Copyright © 2004 Deloitte Development LLC. All rights reserved. Source: Dow Jones VentureOne/Ernst &Young 24
    • Valuation Trends • Higher Median Valuations – In Q4 2004, 60% up rounds – In Q1 2003, 80% flat or down rounds • More competition for deals • Greater ability to fund without a syndicate • Exits continue to improve Copyright © 2004 Deloitte Development LLC. All rights reserved. 25
    • Valuations On Upward Trend Median Premoney Valuation by Year $25.5 $25 Median Premoney Valuation ($M) $21.1 $20 $15.5 $16.0 $15.0 $15 $12.9 $13.0 $11.1 $10.7 $10.0 $10.0 $10 $9.3 $5 $0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 1Q05 Copyright © 2004 Deloitte Development LLC. All rights reserved. 26
    • 1Q’05 Valuations Highest Since 2001 Median Premoney Valuation $15.0 $15 $13.8 $13.3 Median Premoney Valuation ($M) $12.3 $12.2 $12.0 $12.0 $10.9 $10.3 $10.1 $10.0 $10.0 $10 $9.1 $5 $0 1Q02 2Q02 3Q02 4Q02 1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 3Q04 4Q04 1Q05 Copyright © 2004 Deloitte Development LLC. All rights reserved. 27
    • 2nd and Later Stage Valuations Dip in 1Q’05 Median Premoney Valuations by Round Class (All Industries) $40 Median Premoney Valuation ($M) $31 $30 $24 $20 $12 $12 $10 $5 $7 $3 $3 $0 1Q02 2Q02 3Q02 4Q02 1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 3Q04 4Q04 1Q05 Later Stage Second Round First Round Seed Round Copyright © 2004 Deloitte Development LLC. All rights reserved. 28
    • Term Sheet Trends • Use of senior liquidation preferences decreasing (especially multiples) • Full ratchet anti-dilution is unusual • Pay to play is still in use • Number of corporate reorgs for post A financings has dropped Copyright © 2004 Deloitte Development LLC. All rights reserved. 29
    • Exit Trends • M&A has greatly improved • IPO's are sparse, but still happening Copyright © 2004 Deloitte Development LLC. All rights reserved. 30
    • M&As Remain Primary Exit Option Percentage Breakdown of Venture Backed Liquidity Events: IPO vs. M&A 1Q05 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 0% 20% 40% 60% 80% 100% IPOs Copyright © 2004 Deloitte Development LLC. All rights reserved. M&As 31
    • M&A Activity Steady in 1Q ’05 Transactions and Amount Paid in M&As 458 450 $100 $98.1 402 393 380 Number of Transactions 335 $80 Amount Paid ($B) 304 300 253 $60 232 197 162 $43.1 $40 150 $26.0 $21.8 $22.7 79 $20 $10.1 $12.7 $14.8 $10.8 $13.0 $7.1 $0 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 1Q05 Amount Paid ($B) Number of Transactions Copyright © 2004 Deloitte Development LLC. All rights reserved. 32
    • Gains from M&A Exits Pick Up Median Amount Paid in M&As vs. Median Amount Raised Prior to M&A $100 $100 $100 Median Amount Raised Prior to M&A ($M) $75 $75 Median Amount Paid ($M) $60 $55 $50 $50 $40 $40 $33 $31 $25 $26 $23 $24 $25 $18 $21 $25 $15 $19 $11 $10 $17 $5 $6 $6 $7 $0 $0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 1Q05 Median Equity Raised Prior to M&A Copyright © 2004 Deloitte Development LLC. All rights reserved. Median Amount Paid ($M) 33
    • 60% of 1Q’05 M&As Initially Financed in ’99-’01 Median Time From Initial Equity Funding to M&A 6 5.2 4.7 4.6 4.0 4 Number of Years 3.6 3.5 3.0 2.8 2.7 2.4 2.0 2 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 1Q05 Copyright © 2004 Deloitte Development LLC. All rights reserved. 34
    • IPO Activity Slows in 1Q’05 Deals and Amount Raised Through IPOs 250 $30 250 216 $25 202 200 Venture-Backed IPOs Amount Raised ($B) $20 $19.5 $19.2 144 150 120 $15 100 $10 $8.7 68 67 $5.0 $4.6 $5.0 50 $5 $3.7 22 20 22 8 $1.8 $1.6 $1.4 $0.4 $0 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 1Q05 Amount Raised ($B) Venture-Backed IPOs Copyright © 2004 Deloitte Development LLC. All rights reserved. 35
    • Fewest Venture-Backed IPOs in Six Quarters Deals and Total Amount Raised Through IPOs $1.8 24 $1.7 25 $1.5 19 $1.4 20 Venture-Backed IPOs Amount Raised ($B) $1.2 $1.2 14 14 15 $0.9 $0.9 $0.8 10 9 8 10 $0.6 $0.7 6 6 4 $0.4 $0.4 5 $0.3 $0.4 $0.4 2 1 $0.2 $0.0 $0.03 0 1Q02 2Q02 3Q02 4Q02 1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 3Q04 4Q04 1Q05 Amount Raised ($B) Venture-Backed IPOs Copyright © 2004 Deloitte Development LLC. All rights reserved. 36
    • Half of 1Q’05 IPOs from Vintage Years ’99-’00 Median Time From Initial Equity Funding to IPO 6 5.7 5.7 5 4.9 4.5 4.1 4 Number of Years 3.5 3.6 3.1 3.1 3 2.8 2.9 2 1 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 1Q05 Copyright © 2004 Deloitte Development LLC. All rights reserved. 37
    • IPOS in 2004 and 2005 IPOs in Calendar '05 (by Effective Date) Six M onths Ended June 30, 2005 and the 12 M onths Ended December 31, 2004 35 30 25 20 2005 15 2004 10 5 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Copyright © 2004 Deloitte Development LLC. All rights reserved. 38
    • PART II • The Fundraising Process • Tools for Financing your Company • Financial Modeling • Valuation Techniques • Capitalization • Exits Copyright © 2004 Deloitte Development LLC. All rights reserved. 39
    • Preparing to Fundraise • Sales Mindset • Sales Process • Sales Tool Kit Copyright © 2004 Deloitte Development LLC. All rights reserved. 40
    • Sales Process Prepare Approach Term Sheet 1 to 2 Months 1 to 3 Months 1 to 2 Months Copyright © 2004 Deloitte Development LLC. All rights reserved. 41
    • Sales Process (Prepare) Prepare Key Elements include: •Create Runway (or Perceived Runway) •Get Current Investor Commitment •Scrub The #s 1 to 2 Months •Align The Organization •Define Your Objective •Define Roles & Responsibilities •Prepare Sales Tool Kit •Identify Targets •Create Scarcity Value Copyright © 2004 Deloitte Development LLC. All rights reserved. 42
    • Sales Process (Approach) Approach Key Elements include: •Get Referrals •First Meeting •Subsequent Meetings 1 to 3 Months •All-Partners Meeting •Consultant Meetings •Customer Meetings •Due Diligence •Site Visit •Term Sheet (or Pass) Copyright © 2004 Deloitte Development LLC. All rights reserved. 43
    • Sales Process (Term Sheet) Term Sheet Key Elements include: •Negotiate •Draw Legal Documents 1 to 2 Months •Signature •Pre-Close Review •Close •Confirm $ Deposited •Due Diligence IS Still Happening! Copyright © 2004 Deloitte Development LLC. All rights reserved. 44
    • Financing your Company • Be realistic on timing and pricing • Become a great writer and spreadsheet jock • Plan your approach using all resources • Practice, practice, practice • The first term sheet is often the best Copyright © 2004 Deloitte Development LLC. All rights reserved. 45
    • Financing Tool Kit • Elevator Pitch • Story/Demo • Presentation • Executive Summary • Business Plan • Due Diligence Package Copyright © 2004 Deloitte Development LLC. All rights reserved. 46
    • Elevator Pitch • Definition – 2-3 sentences that defines the market, customer, problem/solution and uniqueness of the business – Place on slide one (display as brief bullets with a graphic) • Framework – What market are you in? – What urgent problem are you solving? – What is the size of the opportunity? – Why will you win (differentiation, barriers to entry, unfair advantage)? – Where is the validation (customers, investors, etc.)? Copyright © 2004 Deloitte Development LLC. All rights reserved. 47
    • Elevator Pitch • Example Diamond develops proprietary thin film diamond products and equipment that dramatically improve heat dissipation on microprocessors, solving one of the highest priority pain points in the industry. We address growing markets that will exceed $1.5B by 2006 and will become the dominant supplier with the best team having the most comprehensive patent position in the industry. Intel is our largest current investor, and we are actively engaged with other top target customers and partners who provide very strong references. Copyright © 2004 Deloitte Development LLC. All rights reserved. 48
    • Building the Executive Summary • Primary Uses – Initial introduction to investors (may accompany introductory email) – Prepares investors for meeting • Best Practices – Text derived from your presentation – Drill down in key areas, but be concise – Highlight external validation – Less than 5 pages – Use as tool to sell the team • Supporting Materials – Business plan, sales pipeline, IP roadmap, competitive landscape, etc. – Make available only as appropriate (avoid material overload) Copyright © 2004 Deloitte Development LLC. All rights reserved. 49
    • Executive Summary Outline • Definition – 3-5 pp text document which includes all the elements of a business plan • Outline – Business Definition/Company Purpose – Business/Technology Problem – Company/Product Solution – Market Trends/Size /Growth – Competitive Assessment/Point-of-Difference – Product/Technology/IP – Sales/Distribution – Team/BOD – Financials Copyright © 2004 Deloitte Development LLC. All rights reserved. 50
    • Business Plan Outline • Definition – 10-20 pp text document with before appendices • Outline – Executive Summary (3-5 pages) – Business Overview and Strategy (1-2 pages) – Technology and Product (3-5 pages) – Market and Competition (3-5 pages) – Sales and Marketing (3-5 pages) – Management and Board (3-5 pages) – Financial Summary (2-3 pages) Copyright © 2004 Deloitte Development LLC. All rights reserved. 51
    • Appendices • Full management resumes • Annual Financial Projections • Product Information • Market Studies Copyright © 2004 Deloitte Development LLC. All rights reserved. 52
    • Financial Modeling • It is forecasting, not a budgeting, tool • Work on the financial model together with the presentation and executive summary • Do not provide more detail than the plan • Use sensitivity analysis, but present the “expected case” • Refer to assumptions throughout the plan • Check for mistakes and “reasonableness” • Get help Copyright © 2004 Deloitte Development LLC. All rights reserved. 53
    • Creating Financial Projections • Create a revenue model • Plan New Hires • Estimate any Significant One-Time Costs • Use only annual income statement and balance sheet • Prepare monthly or quarterly cash flow forecast until breakeven • Don’t sweat the details Copyright © 2004 Deloitte Development LLC. All rights reserved. 54
    • Revenue Model • Build a specific revenue model that mirrors your industry • Compare with industry standards, highlight any differences • Prepare the model from the “bottoms up” • Do not over estimate first year revenue • Do make a 5 year forecast • Know the way revenue is recorded for your industry Copyright © 2004 Deloitte Development LLC. All rights reserved. 55
    • Headcount • 80% of all early year expenses are headcount related • Make sure you are reasonable with salaries • Match additions of people with company milestones • Don’t forget taxes, benefits and recruiting expenses • Build a sales commission model, if necessary • Index salaries to inflation and add bonuses Copyright © 2004 Deloitte Development LLC. All rights reserved. 56
    • Other Expenses • Don’t sweat the other expenses • Make sure rent increases as needed • Watch consulting and professional services • Begin taxes at the appropriate time Copyright © 2004 Deloitte Development LLC. All rights reserved. 57
    • Balance Sheet • Do create a balance sheet • Use industry standards for AR and AP assumptions (typically 60 days and 30 days) • Include financing assumptions on your balance sheet • Make sure it balances (the balancing item is cash) Copyright © 2004 Deloitte Development LLC. All rights reserved. 58
    • Cash Flow Statements • A Flow of Funds statement is typical and easiest • Use the Receipts and Disbursements statement if you are brave • Cash flow statements are derived from the income statement and balance sheet • Do not make changes on the cash flow statement • Show monthly or quarterly cash flows until breakeven in the appendix or as backup slide Copyright © 2004 Deloitte Development LLC. All rights reserved. 59
    • Charts and Tables • In the presentation or business plan, use charts and tables to highlight – Revenue (esp. as compared to competitors) – Sales and distribution model (to explain those 90% gross margins) – Five year annual summary • Other charts and graphs can show key events to next funding round, cash flow breakeven or the cash flow cycle Copyright © 2004 Deloitte Development LLC. All rights reserved. 60
    • Valuation Techniques • Comparables (as in real estate) • Discounted Cash Flows (DCF) • Return on Investment • Other rules of thumb Copyright © 2004 Deloitte Development LLC. All rights reserved. 61
    • Post and Pre Money • You know the pre-money valuation when you have an offer to purchase stock • Post money is simply the amount of money you have raised divided by the portion of the company you sold to raise it – For example, in a seed round you raise $2M and give up 40% of the company – The post money is $5M ($2M/40%) and the pre money is $3M ($5M - $2M) Copyright © 2004 Deloitte Development LLC. All rights reserved. 62
    • Capitalization-Founders Round • Before first financing is founders round – Founders vs. early employees – Typically split common stock among the founders – Low per share price • Cap Table shows 4M shares at $.01 per share • Post money valuation is $40,000 Copyright © 2004 Deloitte Development LLC. All rights reserved. 63
    • Capitalization-Seed or A Round • First outside financing • Typically is funded by angels • Often completed as a note to convert into equity when a VC participates • Investors purchased 1.5M shares at $.50 per share which is 27% of the company (1.5/5.5) • The company then established a stock option plan of 1M shares, diluting the investors by 4% to 23% Copyright © 2004 Deloitte Development LLC. All rights reserved. 64
    • Capitalization-Series B • Second round of outside financing • Usually completed after a significant milestone is reached • The company raised $2.5M at $.62 per share, a 24% increase from the prior round • The post money valuation is now $6.5M ($2.5M raised divided by 38%) • The company again added to the stock option plan, diluting the Series B investors by 6% to 32% Copyright © 2004 Deloitte Development LLC. All rights reserved. 65
    • Capitalization-Series C and Later • The typical life span of a company is 5- 7years before an IPO or acquisition • Usually there are 3 rounds of funding • The last round before an exit is called the mezzanine round • The company raised $4M for 29% of the company for a post money valuation of $14M • The company did not add any shares to the stock option plan Copyright © 2004 Deloitte Development LLC. All rights reserved. 66
    • IPO or Acquisition • In the Acquisition scenario, the company sold all of its shares for $75M in cash • In the IPO scenario, the company sold $35M of common stock for 15% of the company for a post money valuation of $238M (3x the acquisition price) • All of the preferred stock was converted to common stock • Which would you choose? Copyright © 2004 Deloitte Development LLC. All rights reserved. 67
    • Choosing an Exit • Prepare for an IPO – Build a great management team – Put business systems in place to support rapid growth – Act like a public company • Do business development as if an acquisition was likely – More than 80% of exits are by acquisition – Cash in the bank can be better than an IPO – Work with business partners that can acquire you – “Dual track” is a popular tool for maximizing value Copyright © 2004 Deloitte Development LLC. All rights reserved. 68
    • Summary • Create a great demo and presentation • Use the executive summary to market your company • Make the financial projections work with the assumptions in your pitch • Practice your pitch with an experienced audience • Keep revising your plan and projections as you grow • Good luck Copyright © 2004 Deloitte Development LLC. All rights reserved. 69
    • Copyright © 2004 Deloitte Development LLC. All rights reserved. 70